| | |  Editorials | Opinions | November 2009 
Mexico’s Fiscal Woes
 Robert Cyran & Martin Hutchinson - breakingviews.com
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November 28, 2009
 |  | In a few years — or earlier if oil prices decline — Mexico faces a serious fiscal crisis. |  | | |
Fitch’s downgrade this week of Mexico’s credit rating by a notch, to BBB, was a warning. Mexico has too many problems to keep going the way it has.
Oil production from Pemex, the state-owned monopoly operator, averaged 2.61 million barrels a day in 2009, down 7 percent from 2008 and 22 percent from the 2004 peak. Although Pemex budgeted $19 billion for deepwater exploration in 2009, no new large fields have been found, and the company has $50 billion in debt. In 2008, Mexico’s Congress rejected a proposal from President Felipe Calderón to allow some foreign investment in oil exploration.
Pemex needs some help. Its production is declining and exports are falling even faster; it is down 13 percent from 2008 and 35 percent from 2004. With Mexico’s population growing 1.1 percent annually, domestic consumption very likely will rise over time, although the recession has brought it down this year. The only good news for the Mexican government, which depends heavily on revenue from Pemex, is that the current oil price is well above the $59 a barrel assumed in budget calculations.
In a few years — or earlier if oil prices decline — Mexico faces a serious fiscal crisis. The combination of unequal income distribution and high tax evasion are limiting the government’s non-oil revenue to 10.8 percent of gross domestic product, well below the average for middle-income countries. The national economy has the same sort of problem as government. Mexican productivity remains below its 1980 level.
Mexico’s most pro-market party has been in power since 2000, yet little has been achieved, particularly in relation to Pemex. It doesn’t help that the legislature is controlled by the opposition, but the more fundamental issues are the persistence of a generally antimarket political tradition, and hefty doses of crime and corruption. Change isn’t likely without a crisis, but that might come distressingly soon.
For more independent financial commentary and analysis, visit www.breakingviews.com. |
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